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Interest only mortgage loans are those where the borrower is required to pay low monthly mortgage payments towards repayment of interest. The borrower will continue this for a specified period of time. At the end of the interest term, the borrower has to pay the entire principal amount.
However, this type of loan is not suitable for everyone. For borrowers, who depend on regular monthly wages, this loan can spell a financial disaster resulting in a foreclosure and a damaged credit history. Interest only loans are suitable for those who have an unpredictable or fluctuating income or those who have a disciplined investment strategy. Also, borrowers predicting a stupendous increase in their incomes can opt for this loan.
Apart from relatively high mortgage payments at the end of interest only term, there is another disadvantage. Customers get attracted to this type of loans when they are presented by lenders as a new type of mortgage with rates far lower than the standard fixed rate mortgages. However, these new loans are presented in the form of ARMs or adjustable rate mortgages. These loans present an increased risk. In these types of loans, the interest rates will be adjusted at the end of the interest-only period. The ARMs are adjusted in the future depending on the increased market rates at that time resulting in the borrower paying far higher amounts towards mortgage repayment.
This type of loan is mostly preferred as a short-term loan. Many people tend to refinance or sell their homes during the interest-only period itself. This can be problematic when the real estate prices are sharply declining. Since the home loses its value, no equity will be available on the existing home in order to opt for a refinance. Even if you sell the home in such situation, you would end up bearing heavy losses.
It is important that customers evaluate their options before opting for this loan type.
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